ASSET DEPLETION: A New Way of Underwriting a $2m + Home Loan?
Category : Laguna Beach Real Estate
Finally, there’s some good news amid the tighter underwriting guidelines that we’ve been given over the past few years. There’s a new method of underwriting among at least two “portfolio” lenders that should open the door for buyers of some higher-priced properties. It’s called “Asset Depletion” or “Asset Utilization” and it can help homebuyers that have lots of liquid assets but are unable to provide income tax returns that show enough income to qualify.
I’ve seen it advertised by several lenders and brokers lately but do you know how it works? Here’s how…
Let’s say that the Borrower has insufficient income reported on his/her tax returns to qualify for a loan but has $2.5 Million in cash and investments. Let’s also say that that borrower is 60 years old.
One lender says that in addition to the income that is used based on their tax returns, we can also take the Assets of $2.5 million and divide it by 25 years (the difference between his current age and 85). That amounts to $100,000 per year. In other words, if the borrower depleted his $2.5 Million assets over the next 25 years he would have $100,000 per year in income to help qualify for the mortgage he needs.
Another lender says that we can simply apply a 4% rate of return to client’s assets. In the example above, that also equates to $100,000 per year.
It’s important to note that this underwriting method does not apply to standard Fannie Mae, Freddie Mac or FHA loans. It is strictly for the couple of lenders that offer it. Additionally, if the borrower is using any of the assets for the down payment we have to subtract that amount.